By Nicole Goodkind, CNN Business
Over the past few months, Yumekia Jones, a legal assistant in the Indianola office of the Mississippi Center for Justice, has received an unusually high number of calls — a peak of around 400% — from people in dire need of financial assistance. immediate.
Most want to avoid payday loans, which offer quick cash against future paychecks without a credit check and come with an interest rate of over 500%. But rapidly rising prices for food, fuel and rent leave them with few options.
Inflation rates are at their highest level in 40 years and unemployment is near a half-century low. For most economists, these two realities spell out significant economic hardship.
To predatory payday lenders, Nevertheless, they announce happy days and good times to come.
“Low unemployment and inflation generally mean that consumers may need loans for additional capital to manage unexpected spikes and expenses while earning money to repay those loans,” said David Fisher, CEO of short-term subprime lender Enova during a May earnings call. The company beat quarterly earnings estimates by 7.7%.
Given the economic dynamics at play, Fisher said his company “significantly leaned into demand through our marketing efforts” and spent more to attract new customers. It paid off. About 44% of all loans went to new customers in the last quarter, he said.
This surge in new borrowers came as U.S. consumer inflation hit its highest level in more than four decades and Americans struggled to put food on their tables and gasoline in their tanks.
Work to get to work
The national average for a gallon of gas is just under $5, up 61% from last year. The jump comes as many employers require workers to return to work in person. The federal minimum wage, meanwhile, still sits at $7.25 an hour, where it has been since 2009. Low-wage workers must work for about 14 hours to fill their reservoir.
About two-thirds of Americans now live paycheck to paycheck, according to a June LendingClub survey. This figure jumps to 82% among workers earning less than $50,000.
The average credit score of low-income people in the United States is also falling, according to data from LendingClub. About 40% of Americans earning less than $50,000 and living paycheck to paycheck have a subprime credit score below 650, which prevents them from getting a loan from a traditional lending institution. or qualify for additional credits. credit. The average credit score in the United States is 714, according to Experian.
For these Americans, high interest payday loans are still readily available. These small loans, usually between $100 and $1,000, are available in more than half of lightly regulated US states. Proof of income and a bank account are all most borrowers need to walk out with cash in hand.
Current data that tracks the number of payday loans has yet to be released, but based on past trends, there’s likely an increase in borrowing, said Alex Horowitz, senior consumer finance project manager. from Pew. “Our survey data shows that approximately 70% of payday loan borrowers use the loan primarily for day-to-day expenses and to meet increased or volatile expenses.”
The debt trap
These loans are often incredibly expensive, but borrowers either don’t have the financial knowledge to research alternatives or don’t think they have any other option. There is currently no federal cap on maximum interest rates for small loans. Not all states allow them, and it is up to those states to decide whether they will implement their own caps.
In the 32 US states that allow payday loans, average annual interest rates range from 200% in Minnesota to 664% in Texas.
Borrowers often cannot repay the full loan amount when due, usually in two to four weeks, leading them to take out a second loan with additional fees. This creates a cycle of indebtedness that is difficult to break. Nearly 1 in 4 payday loan recipients take out additional loans nine or more times, the Consumer Financial Protection Bureau found.
Studies show that black and Latino communities are disproportionately targeted by high-cost loan providers. In Michigan, where the average payday loan interest rate is 370%, there are 7.6 payday stores per 100,000 people in areas with more than a quarter of the population black and of Latinos. That’s about 50% more than in other areas, according to data provided by the Center for Responsible Lending.
Companies that offer high-cost loans say they are providing a needed service to low-income communities by providing loans to Americans that traditional banks refuse to serve. They claim that high interest rates are necessary because of the high risk of default. But consumer advocates say it’s a false narrative.
Seven major U.S. banks, including Bank of America, Wells Fargo and Truist, have created programs that offer small-dollar borrowing options with low annual interest rates, Horowitz said. They plan to look at bank history — not credit scores — to determine who qualifies for loans.
“There are 18 states and the District of Columbia that have banned payday loans and have survived very well without these predatory loan products,” said Nadine Chabrier, senior policy adviser at the Center for Responsible Lending. “There are fair and responsible loan products that have low interest rates and fees that are available for people to use.”
Shortly after the Covid-19 pandemic hit the United States, the Consumer Financial Protection Bureau repealed significant parts of a 2017 rule that required lenders to assess consumers’ ability to repay their loans. The rule, they said, would have wiped out much of the money they make from borrowers who default on their loans. By repealing parts of the rule, the CFPB said it would ensure “the continued availability of low-cost loan products for consumers who demand them.”
In a blog post, former CFPB director Dave Ueijo expressed concern about the rule changes, saying he had issues with “any lender’s business model that relies on the inability of consumers to repay their loans.
Buy now pay later
Proponents are also concerned about new forms of lending that have emerged in recent years that are generally far less regulated than even payday loans.
According to the Center for Responsible Lending, Buy Now, Pay Later (BNPL) companies have seen their total market share increase by 200-350% over the past two years. Now, companies like Klarna and Zip are teaming up with Chevron and Texaco to let Americans fill their tanks now and pay in installments over six weeks.
BNPL clients tend to be Millennials and Gen Zers and two-thirds of applicants are subprime borrowers, according to research by Harvard Kennedy School researcher Marshall Lux.
These companies do not present themselves as lenders. BNPL is not credit but debit, with refunds taken automatically from customers’ bank accounts and without interest or charges.
In California, 91% of consumer loans issued in 2020 were BNPL loans, and 24% of financially vulnerable BNPL recipients report difficulty making payments.
BNPL’s lenders are not required by law to determine a borrower’s ability to repay their loans. There are no regulations regarding the disclosure of late payment fees, account reactivation or rejected payments.
“If people are using a credit product like this for their basic needs, I’m worried,” Chabrier said. She is concerned that BNPL clients may open several loans at once, they might lose track or have trouble repaying them all.
“A lot of people use buy now and pay later to stack their purchases from multiple vendors,” Chabrier said. “Because of the lack of subscription and whether or not they can afford these items, it becomes really unaffordable for them.”
Klarna caps late fees at 25% of the purchase amount, a far cry from the 400% interest rates charged by payday lenders, but Chabrier sees this as a lesser symptom of a larger problem.
“They continue this process of extracting money from low-income people,” she said. “If people have less purchasing power with their salary, it will only get worse.”
Back in Mississippi, which has the highest poverty rate in the nation, Jones struggled to keep distressed callers out of the hands of loan sharks and into financial education programs sponsored by local banks. But it’s hard to work against so many payday lenders with huge advertising budgets, she said. The state has the highest concentration of payday lenders per capita in the nation, mostly in low-income areas or in communities of color.
Payday lenders are so prevalent in Mississippi, Jones said, that they outnumber McDonald’s restaurants by more than 5 times.
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